School of Business Conference Examines 'Flash Crash'

U.S. Securities and Exchange Commissioner Kathleen L. Casey gave the closing keynote speech at a McDonough School of Business conference, which took place on the anniversary of last year's "Flash Crash."

May 6, 2011– The lesson from last year’s “Flash Crash” is “the absolute necessity for understanding how our markets operate and are developing today,” U.S. Securities and Exchange Commissioner Kathleen L. Casey said at a McDonough School of Business (MSB) conference May 6.

The Flash Crash happened on May 6, 2010, when the Dow Jones Industrial Average dropped about 900 points and quickly recovered within minutes. Casey gave the closing keynote speech at the conference and talked about the SEC’s role in market regulation.

“If we knew the markets of 2011 – using our understanding of how these markets operated in 1991 or 2001 – we would make serious mistakes in how we regulate them,” Casey said.

A Different World

The conference, sponsored by the business school’s Center for Financial Markets and Policy, examined the U.S. market structure and lessons learned from the crash.

Reena Aggarwal, the center’s director and Robert E. McDonough Professor of Business, introduced the experts at the conference and spoke about today’s financial circumstances.

“Today, it’s a different world,” she said. “Many of the exchanges are operating in a very competitive global environment. We have seen the consolidation of exchanges, tremendous innovation and fragmentation issues as well as new threats to the financial system – cyber security issues that could cause the flash crash of the future.”

Market Shocks

The introductory keynote speaker, Bryan Durkin of the CME Group, said the Flash Crash demonstrated that “in even the most liquid markets, demands for liquidity can sometimes legitimately overwhelm the supply.”

“I think the takeaway is that we know there will be market shocks,” he said, “but having sound structures and rules can strengthen the resilience of the markets in these very turbulent times.”

Two Panels

The first panel discussion, “Is The U.S. Market Structure Flawed? If So, What Should We Do About It?” included moderator Aline van Duyn, U.S. Markets editor, Financial Times; Albert “Pete” Kyle, an economist at the University of Maryland; Chris Isaacson, senior vice president and chief operating officer, BATS Exchange; Joe Mecane, executive vice president and co-head of U.S. Listing and Cash Execution, NYSE Euronext; and David Shillman, associate director, Division of Trading and Markets, SEC.

Murphy’s Law

“Make sure that we contain the damage when something breaks, because something will break,” Angel cautioned in the latter panel. “Murphy’s Law has not been repealed.”

Among the strategies the participants suggested to improve market structure included coordinating a system-wide trading halt when one exchange slows down or halts its market, applying consistent safeguards between trading venues and across markets, and implementing real-time surveillance to stop improprieties.

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